Measures of Unemployment

and Inflation
1
TOPIC
Employment and Unemployment

Population Survey

In Bangladesh working-age population is the number of

people aged 15 years and older.
Employment and Unemployment

The working-age population is divided into two groups:

People in the labor force
People not in the labor force
The labor force is the sum of employed and unemployed
workers. This is also known as the economically active
population.
Employment and Unemployment

To be considered unemployed, a person must be:

without work, available for work and has been actively
looking for jobs within the past four weeks or waiting to
be called back to a job from which they were temporarily
laid off.
Actively looking: specific efforts to find a job such as
newspaper survey, reporting to the labor department etc.
Note that work here means gainful activity it does not
just mean a job for wages, it can be self-employment, or
working without pay in a family business.
Employment and Unemployment
This Figure shows the labor
force categories. In June
2012 in USA:
Population: 314 million
Working-age population:
243.4 million
Labor force: 155.0 million
Employed: 142.2 million
Unemployed: 12.8 million
Employment and Unemployment

Labor Market Indicators

The unemployment rate is the percentage of the labor
force that is unemployed.
The unemployment rate is:

100

In June 2012, in USA, the labor force was 155 million and
12.8 million were unemployed, so the unemployment rate
was 8.2 percent.
The unemployment rate increases in a recession and
reaches its peak value after the recession ends.
 Employment and Unemployment
This Figure shows the unemployment rate in USA: 1980
2012.
The unemployment rate increases in a recession.
Employment and Unemployment

Labor Market Indicators

In Bangladesh, according to labour force survey 2013, the
rate of unemployment stands at 4.3%.
In the urban area, the unemployment rate was 5.8%
On the other hand, the rate of unemployment was 3.6% in
the rural area.
Employment and Unemployment
Trends of Unemployment rates in Bangladesh
Employment and Unemployment

Source: LFS 2010, Bangladesh Bureau of Statistics.

This Figure shows unemployment rate in Bangladesh in
2010 by age and sex
Employment and Unemployment
Labor Market Indicators
The employment rate or the employment-to-population ratio
is the percentage of working-age people who have jobs.
The employment-to-population ratio is:

100

In June 2012, in USA, the employment was 142.2 million and the
working-age population was 243.4 million. In USA, the
employment-to-population ratio was 58.45%.

In Bangladesh, in 2010, this ratio was 56.6%.

In 2013, the ratio was 54.6%.
Employment and Unemployment
Formal vs. Informal Sector in Bangladesh
Informal sector: The part of an economy that is not taxed or monitored
by any form of government, e.g., household helpers, street vendors, shoe
shiners, junk collectors etc.

Source: LFS 2013, Bangladesh Bureau of Statistics.

Employment and Unemployment

In 2013, the ratio was 57%.

Employment and Unemployment

Labor Market Indicators

The labor force participation rate falls during recessions as
discouraged workerspeople available and willing to
work but who have not made an effort to find work within
the last four weeksleave the labor force.
Discouraged workers are not considered unemployed
Some economists think that the unemployment rate is
therefore biased downward and underestimates the real
unemployment problem in the society.
Employment and Unemployment
This Figure shows that in the US, the labor force participation
rate and the employment-to-population ratio both trended
upward before 2000 and downward after 2000.
Employment and Unemployment

The Anatomy of Unemployment

Three types of people become unemployed:
Job losers workers who have been laid off or fired and
are searching for new jobs.
Job leavers workers who have voluntarily quit their
jobs to look for new ones. Job leavers are the smallest
fraction of the unemployed.
Entrants and reentrants people entering the labor
force for the first time or returning to the labor force and
searching for work.
Employment and Unemployment

The Anatomy of Unemployment

People end a spell of unemployment for two reasons:
Hired or recalled workers get jobs, or start other gainful
activity such as self-employment.
Discouraged unemployed workers withdraw from the labor
force.
Employment and Unemployment

Types of Unemployment
Unemployment can be classified into four conceptual
types:
Frictional
Structural
Seasonal
Cyclical
Employment and Unemployment

Types of Unemployment
Frictional unemployment is unemployment that arises
from normal labor market turnover. The economy changes
constantly, requiring shifts in activity and jobs new
products grow, old ones die. Same with jobs.
The creation and destruction of jobs requires that
unemployed workers search for new jobs. People moving
from job to job or university graduates looking for jobs fall
into this category.
Increases in the number of young people entering the
labor force, and increases in unemployment benefit
payments [which reduce the opportunity cost of
unemployment] tend to raise frictional unemployment.
Employment and Unemployment

Types of Unemployment
Structural unemployment is unemployment created by structural
changes in the economy i.e. changes in technology, foreign
competition, and the structure of production, including skills and
experience necessary to perform jobs and the geographic locations
of jobs, and the characteristics of the labor force
Seasonal unemployment is unemployment caused by season
changes e.g. during Winter, there is a huge increase in employment
opportunities in the tourism industry in Thailand and the Caribbean.
Lots of jobs in restaurants and clubs, which are unavailable during
other seasons.
Cyclical unemployment is the fluctuation in unemployment
caused by the business cycle.
Unemployment and Full Employment

Full Employment
Full employment occurs when there is no cyclical
unemployment or, equivalently, when all unemployment is
frictional, structural or seasonal.
The unemployment rate at full employment is called the
natural rate of unemployment (frictional + structural +
seasonal)
Unemployment and Full Employment

Real GDP and Unemployment Over the Cycle

Potential GDP is the quantity of real GDP produced at full
employment.
It corresponds to the capacity of the economy to produce
output on a sustained basis. Real GDP minus potential
GDP is the output gap.
Over the business cycle, the output gap fluctuates and the
unemployment rate fluctuates around the natural
unemployment rate.
Unemployment and Full Employment
This Figure shows the
output gap and

the fluctuations of
unemployment around the
natural rate.

When the output gap is

negative, ...

the unemployment rate

exceeds the natural
unemployment rate.
Price Level and Inflation

The price level is the average level of prices and is

measured by using a price index.
The Consumer Price Index, or CPI, measures the average
level of the prices of the average or representative basket
of goods and services purchased or consumed by a typical
household.
Besides the CPI, another price index is often cited: the GDP
deflator or the GDP implicit price deflator. GDP deflator is
based on all goods and services produced in an economy.
Price Level and Inflation

Reading the CPI Numbers

The CPI is defined to equal 100 for the reference base
period.
The value of the CPI for any other period is calculated by
taking the ratio of the current cost of the CPI basket of
goods to the cost of the same CPI basket of goods in the
reference base period and multiplying by 100.
Price Level and Inflation

Constructing the CPI

Constructing the CPI involves three stages:
Selecting the CPI basket
Conducting a monthly price survey
Every month, BLS (Bureau of Labor statistics)
employees check the prices of the 80,000 goods in the
CPI basket in 30 metropolitan areas.
Using the prices and the basket to calculate the CPI
Price Level and Inflation

This Figure illustrates the

CPI basket.
Housing is the largest
component.
Transportation and food
and beverages are the next
largest components.
The remaining components
account for 26 percent of
the basket.
Price Level and Inflation

For a simple economy that consumes only oranges

and haircuts, we can calculate the CPI.
The CPI basket is 10 oranges and 5 haircuts.

Item Quantity Price Cost of CPI

basket
Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50

Price Level and Inflation

This table shows the prices in the base period.

The cost of the CPI basket in the base period was $50.

Item Quantity Price Cost of CPI

basket
Oranges 10 $1.00 $10

Haircuts 5 $8.00 $40

Cost of CPI basket at base period prices $50

Price Level and Inflation

This table shows the prices in the current period.

The cost of the CPI basket in the current period is $70.

Item Quantity Price Cost of CPI

basket
Oranges 10 $2.00 $20

Haircuts 5 $10.00 $50

Cost of CPI basket at current period prices $70

Price Level and Inflation

The CPI is calculated using the formula:

CPI = (Cost of CPI basket in current period/Cost of CPI basket in base
period) 100.
Using the numbers for the simple example, the CPI is
CPI = ($70/$50) 100 = 140.
The CPI is 40 percent higher in the current period than in the base
period.
3 types of CPI:
i) Laspeyres Index: CPI basket is the base year basket
ii) Paasche Index: CPI basket is the current year basket
iii) Fisher Index: Geometric mean of Laspeyres and Paasche
indices
Price Level and Inflation

Measuring Inflation
The main purpose of the CPI is to measure inflation.
The inflation rate is the percentage change in the price
level from one year to the next.
The inflation formula is:
Inflation rate = [(CPI this year CPI last year)/CPI last
year] 100.
Price Level and Inflation
This Figure shows the
relationship between
the price level and the
inflation rate.
The inflation rate is
High when the price
level is rising rapidly
and
Low when the price
level is rising slowly.
Negative when the
price level is falling
Inflation Rate in Bangladesh: 2006 - 2015

10-year average: 7.6%

Source: The World Bank (http://data.worldbank.org/)

 Price Level and Inflation

The Biased CPI

The CPI may overstate the true inflation for at least four
reasons:
New goods bias
Quality change bias
Commodity substitution bias
Outlet substitution bias
Note: The CPI does not reflect the price level any one
household faces anyway, because it averages expenditure for
all urban households so includes, e.g., both rental and
ownership costs for housing.
Price Level and Inflation

New goods bias New goods that were not available in the
base year appear and, if they are more expensive than the
goods they replace, the price level may be biased higher.
Example: iPods, Smart Phones, Tablets, etc.
Quality change bias Quality improvements generally are
neglected, so quality improvements that lead to price hikes
are considered purely inflationary.
Price Level and Inflation

Commodity substitution bias The market basket of goods used in

calculating the CPI is fixed and does not take into account consumers
substitutions away from goods whose relative prices increase e.g. if
the price of beef rises and the price of chicken remains unchanged,
people buy more chicken and less beef. Say, this change is such that
the consumers get same amount of protein and same enjoyment and
their expenditure is same as before. The price of protein has not
changed. But, because it ignores the substitution of chicken for beef,
the CPI says the price of protein has increased.

Outlet substitution bias When confronted with higher prices, people

switch to buying from cheaper sources such as discount stores, but
the CPI, as measured, does not take account of this outlet
substitution.
Price Level and Inflation

How big is the bias?

In 1996 a Congressional Advisory Commission chaired by
Michael Boskin, a Stanford Economics professor, tackled
this question.

The result: CPI overstates inflation by 1.1 percentage

points a year, i.e., if the CPI reports that inflation is 3.1% a
year, most likely inflation actually is 2% a year.
Price Level and Inflation

Core Inflation
The figure shows the CPI
inflation rate.

The core inflation rate is

the CPI inflation rate
excluding the volatile
elements (of food and fuel).

The core inflation rate

attempts to reveal the
underlying inflation trend.
Price Level and Inflation
The Real Variables in Macroeconomics
We can use the price level (usually the GDP deflator) to
deflate nominal variables to find their real values.
For example,
Real wage = (Nominal wage/GDP deflator)